Malaysia’s property market slowing

House prices in Malaysia continue to rise, albeit at a slower pace following anti-speculation measures.

In the first quarter of 2014, Malaysia’s nationwide house prices rose by 8% (4.35% inflation-adjusted) from the same period last year, to MYR276,668 (US$86,027), the lowest year-on-year growth since Q4 2010, based on figures from the Valuation and Property Services Department (JPPH). In a quarterly basis, house prices increased 1.65% (0.73% inflation-adjusted) in Q1 2014.

By property type:

For terraced houses, the average price rose by 8.2% (4.4% inflation-adjusted) during the year to Q1 2014

For detached houses, the average price rose by 8% (4.3% inflation-adjusted)

For semi-detached houses, the average price increased 6.6% (2.9% inflation-adjusted)

Malaysia’s residential construction activity is now declining. In Q4 2013, residential building plan approvals were down by 13.5% y-o-y to 33,859. Likewise, housing starts also dropped 13.6% and completions plunged by 15.8% over the same period.

Property demand indicators were mixed. The total value of residential property transactions rose by 6.3% to MYR72.06 billion (US$22.4 billion) in 2013 from a year earlier, according to JPPH. However, the total volume of residential property transactions fell by 9.7% to 246,225 over the same period.

Recent anti-speculation measures are expected to continue to impact transactions volumes. But property prices in upcoming areas/hotspots are expected to continue rising, partly because the market overhang has diminished according to Knight Frank.

The Malaysian economy is expected to expand by a robust 5.2% this year, from an average real GDP growth rate of 5.7% from 2010 to 2013.

House prices still below Asian crisis levels

Amazingly, house prices in Malaysia are still below pre-Asian Crisis 1997 levels. They rose rapidly in the early 1990s in two particularly dramatic surges – in 1991 house prices rose 25.5% (20.3% in real terms), and in 1995 they rose 18.4% (14.4% in real terms).

After the Asian Crisis, prices of luxury detached Kuala Lumpur houses then slumped 39% between 1997 and 1999. However, Kuala Lumpur´s house prices since then have significantly outperformed the rest of the country, especially after the economic downturn of 2008-2009, when the property market was revitalized with the help of the Greater Kuala Lumpur Plan, targeting developing key locations, including the latest “The MRT Project”.

The 2013 prices rises, with Kuala Lumpur´s house price index rising by 14.4% (nominal), shows that Kuala Lumpur retains its status as a market leader. Kuala Lumpur´s housing market is now red-hot, with strong price rises.

The average price of semi-detached houses rose by 14.7% to MYR 421,622 (US$ 128,602).

The high-rise price index soared 13.7%, to an average price of MYR 248,567 (US$75,817).

Low interest rates are encouraging mortgage borrowing

The average lending rate fell to 4.56% in December 2013, significantly below historic rates. The Overnight Policy Rate (OPR) is at 3%. This is despite the base lending rate (BLR) being raised in December 2011 to 6.53%, where it remains.

To make home-buying possible for people on low and medium incomes and young people, in July 2011 the Malaysia People’s Housing (PR1MA) Bill 2011 was launched. Developers are as a result switching from high-end developments to mid-range ones to lure first time buyers with easier financing and reduced stamp duty for houses below MYR 400,000. Borrowers with monthly income up to MYR 7,000 per month qualify for the scheme.

Tighter anti-speculation measures

Some other anti-speculation measures introduced by the government:

Fly-by-night developers targeted. Housing license project deposits of 3% of total estimated project cost were recently introduced. A MYR 500,000 fine, plus maximum of three-year jail term for developers who abandon projects, have been proposed by the Housing and Local Government Ministry.

Capital gains tax rises. On January 1, 2014, the Real Property Gains Tax (RPGT) rose from 15% to 30% on properties sold within three years from purchase.

Taxes on gains on properties sold after four to five years rose to 20% and 15%, respectively. No RPGT will be imposed on citizens for properties sold after six or more years, while companies will be taxed at 5%.

For non-citizens, RPGT on properties sold within a holding period of up to five years is 30%, while RPGT on properties sold within six years or more from purchase is 5%.

The end of the Developer’s Interest Bearing Scheme (DIBS). The government has forbidden banks from offering financing via the DIBS, introduced in 2009 to boost condominium sales, where the developer paid the interest on buyers’ loans during construction of a project. DIBS-financed projects have tended to be significantly more expensive than others, as their prices include financing costs and reflect future property values. According to some, the schemes distorted the market, and in any case, they certainly added to buyers´ liquidity.

Bulk sales. The Malaysian government will soon require property developers to obtain permission before making bulk sales of more than four units. The move is aimed at curbing rising property speculation, and to give ordinary individuals an equal opportunity to buy houses.

The introduction of the new cooling measures is expected to tone down transactions in the property market. This also extends to the leasing market, especially in the prime locations, which, according to Knight Frank, “is also expected to continue facing challenges as an estimated 6,277 units are scheduled for completion by end-2014”.

Tougher restrictions on foreign buyers

The Malaysian government has partly retreated from its December 2006 liberalization of foreign property purchases. In January 2010, the price floor below which foreign buyers cannot buy was hiked to MYR 500,000, twice the previous level. From January 2014 it was hiked again to MYR 1 million (US$ 302,892). Foreign purchases above the threshold are placed under the “purview of the State Authorities” under the regulations, with approval expected to take one to two months.

According to Knight Frank Malaysia, the increase in floor price is not likely to slow the increasing demand for Malaysian property.

Aside from this pricing threshold, there are no other restrictions that hinder non-resident foreign buyers in Malaysia. Malaysia along with Hong Kong and Singapore is one of the Asia-Pacific countries that imposes minimal restrictions on foreign property buyers (see Knight Frank´s July 2013 Asia-Pacific Residential Review).

There has been an upward trend in “Malaysia My Second Home” (MM2H) applications in recent years. The number of application approvals increased to 3,227 in 2012, from 2,387 in 2011, 1,499 in 2010. From 2002 to 2012, the “Malaysia My Second Home” (MM2H) programme attracted 19,488 foreign buyers.

As of November 2013, around 22,320 foreigners were given long-stay approvals under the MM2H program. Most foreign buyers (out of the 122 countries) came from China (4,187 participants), Japan (2,880), Bangladesh (2,603), United Kingdom (2,016) and Iran (1,266).

Housing over-supply?

Although there is a high demand for high-end condominiums, it is also clear that supply continues to increase. It is not really clear if there is oversupply, and the lag in the release of statistics doesn´t make things more transparent.

By end-2012, around 63,008 properties were unsold, a 15.5% rise from the previous year. However, this was still way below the peak of 83,811 unsold units recorded in 2004 - a year which was not followed by house price falls. In 2012 the condominium market saw a large number of construction starts, especially in Ipoh, Johor Bahru, Kota Bharu, Kota Kinabalu, Kuala Terengganu, Melaka, Penang, and Seberang Perai, according to C.H. Williams Talhar & Wong. Overall housing approvals in 2012 rose by 47.4% to 235,249 units. The value of residential construction work rose 24.9% on the year in Q4 2012, to RM5.76 billion (US$1.9 billion).

In Q3 2013 the pressure seemed to be easing, and the number of launches drastically dropped by 74.5% to 3,736 new housing units, from 14,662 units in Q3 2012. As of Q3 2013, housing approvals declined by 22.5% y-o-y to 140,891 units, according to the Ministry of Housing and Local Government.

Moderate yields, small rental market

Kuala Lumpur’s rental yields are moderate. Condominiums enjoy higher gross rental yields, ranging from 4.67% for 300 sq. m. condominiums to around 5.44% for 65 sq. m. condominiums. Bungalows have lower yields as compared to condominiums, ranging from 3.78% to 5.04%, according to the Global Property Guide research in December 2012.

During the second half of 2013, rents of existing high-end condominiums in Kuala Lumpur City have remained stable, ranging from MYR 3.00 (US$ 0.92) to MYR 5.50 (US$ 1.68) per square foot (psf) per month, according to Knight Frank’s latest report.

The government’s Economic Transformation Programme (ETP) has helped to increase the demand for luxury condominiums in Klang Valley, which caters mainly to foreigners, according to C.H. Williams Talhar & Wong.

Malaysia has a small rental market. Only 6% of the housing stock is in the private rental sector. About 85% of total stock is owner-occupied, while government-provided housing accounts for 7% of the stock.

Better economic outlook in 2014

From 2002 to 2008, the economy enjoyed growth rates averaging 5.7%, but growth fell sharply to 1.5% in 2009, during the global financial crisis. In 2010, GDP growth bounced back, surging by 7.4%, and was followed by 5.1% growth in 2011.

In recent months, inflation has been rising. In the first quarter of 2014, inflation rose 3.4%, up from 2.1% in 2013 and 1.7% in 2012. The recent price hikes were partly due to the fuel subsidy cuts implemented by the government in 2013, which raised prices of some petroleum products and eventually lead to an increase in consumer goods. BNM expects higher inflation in 2014, possibly exceeding the 3.2% long-term average.

BNM kept its Overnight Policy Rate (OPR) at 3% in March 2014, in an effort to support economic growth and domestic consumption, even as inflation quickened to the fastest in more than two years. However, it is likely to increase to 3.25% in Q4 2014, according to Edward Lee, Standard Chartered Bank Southeast Asia’s regional head of research.

Unemployment was 3% in March 2014, unchanged from the previous quarter, according to Department of Statistics Malaysia. The country’s unemployment rate averaged 3.4% from 2000 to 2013, according to the IMF.

In the recent May 5, 2013 elections in Malaysia, the federal ruling Barisan Nasional (BN) coalition, dominated by Prime Minister Najib Razak’s party, United Malays National Organisation (UMNO), took over 60% of the parliamentary seats, despite getting only 47.38% of the popular vote. The opposition Pakatan Rakyat (PR) coalition led by Anwar Ibrahim failed to win majority of the seats even though it won 50.87% of the popular vote.

Anwar accused PM Razak and the Election Commission (EC) of electoral fraud, but if so, fraud seems to have carried the day.